Trade Credit & Political Risk Coverage

Trade Credit Insurance is an insurance policy and a risk management product offered by private insurance companies to business entities wishing to protect, in the case of a lending institution, a loan or in the case of a vendor their receivables from loss due to credit risks such as protracted default, insolvency or bankruptcy.

Trade Credit Insurance may be used to cover a single transaction or trade with only one borrower/buyer. Trade credit insurance can also cover a portfolio of borrowers and pays an agreed percentage of a loan or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. The premium rate reflects the average credit risk of the insured borrower or portfolio of borrowers.

Trade credit insurance is purchased by business entities to insure their receivable(s) from loss due to the insolvency of the debtors.  The cost (premium) for this is usually paid periodically, and is calculated as a percentage of all outstanding receivables.

This points to the major role trade credit insurance plays in facilitating international trade. Trade credit is offered by lenders or vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk.

In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer's reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale. The receivable is like a loan or in the case of a bank is a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer's debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.




Political Risk Insurance is a type of insurance that can be taken out against political risk — the risk that a political entity may default in a guarantee provided to lenders or vendors to induce them to execute business with a local corporation or governmental entity or risks as extreme as country revolution or other political conditions will result in a loss.


Political Risk Insurance is available for several different types of political risk, including but not limited to:

·    Political violence, such as revolution, insurrection, civil unrest, terrorism or war;

·    Governmental expropriation or confiscation of assets;

·    Governmental frustration or repudiation of contracts or guarantees issued;

·    Wrongful calling of letters of credit or similar on-demand guarantees;

·    Business Interruption; and

·    Inconvertibility of foreign currency or the inability to repatriate funds.

As with any insurance, the precise scope of coverage is governed by the terms of the insurance policy.

The underwriting of Political Risk Insurance is a dynamic, growing business. As globalization increases, there are more corporations doing business in more places around the world with each passing year. Some of the changes occurring in the business are high growth, new product offerings, and a greater role for private capital.

While Political Risk Insurance policies are sometimes written for specific situations, the major political risk insurers have standard forms for the coverages that they issue. For "complex" or larger investments specific policies are the norm.